Brussels eyes ESG/green indices for giant pan-EU Capital Markets Union project

The European Commission is looking at creating sustainability/ESG and green indices to span the entire ‘Capital Markets Union’ (CMU) initiative.

It plans to commission a €350,000 feasibility study about the creation of a CMU Equity Market Index family – with ESG and green issues deemed “strategically important”.

The Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) says only a small number of EU-listed companies are included in EU-wide equity indices calculated by international index providers.

Some smaller member states are classified as “frontier markets” – which prevents investment by international institutions, especially index investors.

“The creation of an EU-wide CMU Index could facilitate greater local and foreign capital inflows from a broad range of investors and enhance access to finance for a larger pool of companies, especially SMEs,” the tender specification document states. It could ultimately result in a “CMU asset class”.

The feasibility study would look at the “demand side” of indices, i.e. asset managers, as well as defining the conceptual framework of the mooted index family. It would also look at how the index could be used as the underlying basis for tradeable products.

“The goal of sub-indices is to promote and increase the level of awareness and investments in specific strategically important areas (i.e. CMU SME Growth Market Index, CMU Green Index, CMU Sustainability/ESG Index, CMU FinTech Index, etc.),” documents state. The deadline for the receipt of tenders or requests to participate is February 8.Capital Markets Union, part of what’s known as the ‘Juncker Plan’ after European Commission President Jean-Claude Juncker, is an attempt to develop more integrated EU capital markets. The EU’s sustainable finance package is part of that push.

There are 13 legislative proposals seen as key building blocks of the CMU, although only three have been adopted so far.

On the to-do list are proposals for a Pan-European Personal Pension Product (PEPP) and a proposal for a Union covered bonds framework as well as the Sustainable Action Plan issues like taxonomy, low-carbon benchmarks and disclosure of risks for investors (i.e. in MiFID II).

On the latter, the Commission late last week published draft rules to ensure investment firms and insurance distributors consider sustainability topics when advising clients.

“The new draft rules will help integrate Environmental, Social and Governance (ESG) considerations and preferences into investment advice and portfolio management, and into the distribution of insurance-based investment products,” it said – although it said the rules can only be officially adopted once the taxonomy has been agreed.

But it said the move “should ensure that investment firms and insurance distributors can already prepare to take ESG considerations and preferences into account”.